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Question
Your U.S. bank issues a one-year U.S. CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are US $0.78493 per Canadian dollar.
What is the end-of-year profit or loss to the bank if in one year Canadian bond rates increase to 7.538 percent? (Assume no change in either current U.S. interest rates or current exchange rates, US $0.78493/C $1.)
A. Loss of US $5,000.
B. Profit of US $15,000.
C. Loss of C $119,000.
D. Profit of C $50,000.
E. Loss of C $50,000.
Answer
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